The “Fiscal Cliff” and Charitable Giving

December
01

Written by: Jon McGraw

At the beginning of the year, confusion around changes in tax law for itemized deductions made the headlines and even caused some to state they would end up giving less to charity as a result. The cause was “fiscal cliff” legislation reinstating the PEASE limitation on itemized deductions.

In truth, according to Forbes.com, “taxes” are relatively low on the list for why people make charitable donations. Another truth: high earners are beneficiaries of higher deductions under the current tax law, according to Bernie Kent, Forbes.com contributor.

To illustrate: For 2013, A and B file a joint return on $400,000 of adjusted gross income and have $50,000 of total itemized deductions, comprised entirely of mortgage interest and real estate taxes. With the return of the PEASE limitation, A and B are required to reduce their itemized deductions by 3% of the excess of their adjusted gross income ($400,000) over the applicable threshold ($300,000), or $100,000 *.03 = $3,000. Thus, A and B can deduct $47,000 of the $50,000 in itemized deductions on their 2013 tax return.

Now assume the itemized deductions were all charitable gifts. The same 3% limitation applies, but any additional donations will receive the full tax benefit. If they contributed an additional $20,000, they will receive a $20,000 credit for the contribution.

Stated in another manner, in the absence of the additional $20,000 contribution, A and B would have been entitled to deduct $47,000 of their $50,000 charitable donations. Upon making the additional contribution of $20,000, A and B would then be permitted to deduct $67,000 of their $70,000 in total contributions. Thus, A and B have received a $20,000 tax deduction for the additional $20,000 contribution.

In the examples above, the itemized deductions were presented as either/or, but the tax benefit is the same regardless of the source of the itemized deduction. The controlling factor is adjusted gross income which determines the amount of the limitation.

Keep in mind:

  • Consult your tax or financial advisor about your specific situation
  • Your donations must be made by year end to apply for the 2013 tax year